Up-to-the-minute advice, information, resources, and, on occasion, commentary on federal and New Jersey state income taxes, and the various New Jersey property tax rebate programs, and insights and observations on tax policy and professional tax practice, by 40-year veteran tax professional Robert D Flach.

Monday, September 22, 2008

ANOTHER GOVERNMENT UNDERCOVER STUDY OF TAX PREPARERS

The office of the Treasury Inspector General for Tax Administration has prepared a report titled “Most Tax Returns Prepared by a Limited Sample of Unenrolled Preparers Contained Significant Errors” based on an “undercover” operation conducted during the recent tax filing season.

.The following is from the memo to the Commissioner of the IRS Small Business/Self-Employed Division which appears at the beginning of the report.

.“In February and March 2008, TIGTA (Treasury Inspector General for Tax Administration) auditors posed as taxpayers in a large metropolitan area and paid to have 28 tax returns prepared at 12 commercial chains and 16 small, independently owned tax return preparation offices. Auditors paid commercial chains approximately $2,800, averaging $234 per return, and independently owned offices approximately $2,100, averaging $132 per return.

.The preparers were unlicensed and unenrolled. That is, they were not practitioners (attorneys, certified public accountants, enrolled agents, or enrolled actuaries). Preparers made substantial errors when completing tax returns and correctly prepared only 11 (39 percent) of the 28 tax returns (i.e., the tax returns showed the correct amount of taxes owed or refunds due). Of the remaining 17 tax returns that were prepared incorrectly:

.· 11 (65 percent) contained mistakes and omissions that auditors considered to have been caused by human error and/or misinterpretation of the tax laws.

.· 6 (35 percent) contained misstatements and omissions that auditors considered to have been willful or reckless.

.If these incorrect returns had been filed, the net effect to the Federal Government would have been $12,828 in understated taxes (the amount is the net effect because there were instances in which tax liabilities and tax refunds were both overstated and understated).

.We recommended that the Commissioner, Small Business/Self-Employed Division, develop and require a single identification number to control and monitor all paid preparers.”

.The study used 5 scenarios with income ranging from $16,000 to $85,000 using filing statuses of Single, Married Filing Joint and Head of Household. These scenarios included a wide variety of tax law topics related to income, deductions and credits. Detailed information on the scenarios is included in the report.

.Six (6) of the returns that were prepared in the study included business expenses. According to the report none of these 6 returns were prepared correctly.

.The report also states that six (6) preparers acted “willfully or recklessly during the preparation of the five scenarios. These preparers added or increased deductions without the auditors’ permission and in some situations after the auditors had questioned whether they were entitled to receive the deductions.”

.The TIGTA operation is very similar to one conducted by the Government Accountability Office (GAO) a few years ago which resulted in a report to Congress titled “Paid Return Preparers: In a Limited Study, Chain Preparers Made Serious Errors”. The GAO sent undercover agents with two different tax scenarios to a total of 19 offices of 5 “fast-food” commercial tax chains, including H+R Block, in a metropolitan area. In only 2 instances was the correct refund calculated, but all 19 returns contained errors.

.The first thing that I noticed is that the TIGTA undercover “auditors” paid on average $100.00+ more per return to the commercial chains than they did to the independent tax preparers ($234 vs $132)! Of course this did not surprise me – it is a known fact that Henry and Richard and their ilk overcharge.

.Unfortunately I could not find anywhere in the report a breakdown of how the errors made applied to commercial preparation chains vs independent preparers or how the 6 “willful and reckless” preparers fell into these two categories.

.This report echoes the concerns of Congress, fueled by the earlier GAO study, that all paid tax preparers be registered or licensed. Bills have been introduced in both houses to regulate paid tax preparers.

.I, too, am in favor of having the IRS register “unenrolled” tax preparers. I would also welcome the creation of a “Licensed Tax Preparer” (LTP) status. There is already in place the beginnings of a registration process – the IRS currently issues to preparers a special “Preparer Taxpayer Identification Number” so we will not have to reveal our individual Social Security Numbers when we sign tax returns we have prepared for compensation.

.My only concern is that all of the legislation so far has required that registrants pass a test, similar I would expect to the EA exam in order to be allowed to practice.

.For one thing, it would be very literally impossible for the IRS to properly test the probably more than a million current “unenrolled” preparers. They had enough problems administering the EA enrollment exam, with only a few thousand participants each year, and have “outsourced” the EA exam to a private company.

.More important – I have been preparing 1040s for over 35 years without any problems with the IRS. At this point in my career I have absolutely no intention of taking a test to prove that I know what I am doing. While I am not against some kind of competency exam for new preparers, any legislation requiring the registration of tax preparers must include a “grandfather” clause.

.I would suggest that all current tax preparers – for example who have prepared at least fifty (50) 2007 federal individual income tax returns – who have been preparing tax returns consistently for at least five (5) years, and who have earned a minimum average of 20, or even 40, hours of continuing education credits per year for the past five years, be exempt from any kind of test and “grandfathered” in.

.In closing I should point out that I do agree that incompetent and unethical tax preparers are not limited to employees of Henry and Richard and their kind – there are indeed these type of preparers among the unenrolled “independents”, as well as the “enrolled” preparer community (remember all the accounting “ethical improprieties” involved with Enron and other such companies were made by CPAs). I have discussed the issue in my post “Let the Client Beware”.

1 comment:

I agree that it would be virtually impossible for the IRS to properly test the more than a million current “un-enrolled” tax preparers.

I have been in favor of and would also welcome the creation of a “Licensed Tax Preparer”(LTP) status or equivalent program.

I have been preparing 1040s professionally for over 10 years without any problems from the IRS. I too have absolutely no intention of taking any test to prove that I know what I am doing. Not when I can call the IRS on behalf of a taxpayer and pretty much "educate the IRS employee on what is and isn't. If their "agents" are as unarmed as this I think they too should be taking the test.

There does indeed need to be a competency exam for new preparers, any legislation requiring the registration of tax preparers needs to include a “grandfather” clause.

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